Sunday, May 17, 2009

New York Times' Misleading Article On Norway's Oil Fund

New York Times has an extremely misleading article on Norway's soon to be ousted (the centre-right opposition parties leads big in the polls for the parliamentary elections in September this year) socialist government. Norway has since 2005 been led by a left-wing coalition of the Centre Party, the Labor Party and the Socialist Left Party. The Finance Minister is Kristin Halvorsen, leader of the Socialist Left Party.

The article contains many errors, but the perhaps most blatant one is the part about the Norwegian oil fund. One of the decisions Halvorsen made was to increase the equity stake in Norway's oil fund from 40% to 60%. In the New York Times article, this is presented as a smart move given the stock market rally of the last two months.

What is not mentioned is however is that this strategy was implemented already in early 2008, before the dramatic sell-off in global stock markets during late 2008 and early 2009. Stock prices are therefore even now far lower than when Halvorsen decided to invest more in stocks.

As a result, the Norwegian oil fund lost 23.3% of its value last year, or NOK 633 billion (roughly USD 100 billion). The decline in value is even greater if you only look at the equity part of the portfolio. Among the stock picks of the Norwegian oil fund were IndyMac ( NOK 2.3 billion lost), Lehman Brothers ( NOK 514 million lost), Bear Stearns ( NOK 200 million lost) and Washington Mutual ( NOK 168 million lost). Note that this 23.3% figure only refers to 2008, and that all of the gains since March were cancelled out by the losses from January to early March.

Since the oil fund has some equity positions to begin with, the oil fund would have lost a lot of money even without the policy change. But since the policy change increased equity holdings by 50%, a conservative estimate of the loss resulting from Halvorsen's decision would be NOK 211 billion. It's probably even higher given the opportunity cost from foregone bond interest earnings.

Yet despite these massive losses resulting from Halvorsen's decision, the New York Times tries to depict her as a smart investment strategist! It is difficult to get more misleading than that.


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